Impact of Omission of Section 92BA(i) on Transfer Pricing Proceedings for Specified Domestic Transactions: A Comprehensive Analysis

The landscape of Indian transfer pricing has witnessed significant legislative transformations over the past decade, particularly concerning Specified Domestic Transactions (SDT). One of the most litigated issues in recent times has been the legal consequence of omitting specific provisions from the statute book without an accompanying saving clause. The recent judicial pronouncement by the ITAT Delhi in the case of Square Yards Consulting Pvt. Ltd. Vs ACIT serves as a critical milestone in this ongoing debate.

This article provides an in-depth summary and analysis of the aforementioned ruling, exploring the legislative intent behind the Finance Act 2017, the judicial interpretation of statutory "omissions," and the resultant invalidation of transfer pricing proceedings initiated under the erstwhile Section 92BA(i) of the Income Tax Act 1961.

The Genesis and Evolution of Specified Domestic Transactions

To fully grasp the magnitude of the ITAT Delhi's decision, it is imperative to understand the historical context of Specified Domestic Transactions under the Income Tax Act 1961. Initially, transfer pricing regulations in India were exclusively applicable to international transactions. However, to curb potential tax arbitrage between related domestic entities—especially where one entity enjoyed profit-linked tax deductions or holidays—the legislature expanded the transfer pricing umbrella to cover specific domestic transactions.

The Role of Section 92BA and Section 40A(2)(b)

The mechanism for monitoring these transactions was embedded in Section 92BA of the Income Tax Act 1961. Specifically, clause (i) of this section mandated that any expenditure in respect of which payment was made or to be made to "specified persons" as defined under Section 40A(2)(b) would be treated as a Specified Domestic Transaction, provided the aggregate value of such transactions exceeded the prescribed monetary threshold.

Consequently, any assessee engaging in such transactions was required to benchmark them against the Arm's Length Price (ALP) and maintain rigorous documentation, including the procurement of an accountant's report in Form 3CEB.

The Legislative Pivot: Finance Act 2017

While the intent behind tracking SDTs was to prevent tax base erosion domestically, it inadvertently resulted in a massive compliance burden for the average assessee. Recognizing this hardship, the legislature intervened via the Finance Act 2017.